The central premise of this informative, stimulating and flawed book is that the European Union made a terrible mistake by launching the euro without simultaneously taking political action to balance trade within the Eurozone.
A sub-theme is that the dangers in the eurozone caused by its poor design are undermining the global economy and threaten to trigger a catastrophic economic collapse. Varoufakis argues that Europe’s vulnerability could contaminate the economies of the US and China, and the rot would quickly spread to elsewhere in the world as well.
So firstly, what’s the problem with the euro?
According to Varoufakis (and many others), the eurozone lacks any adequate built-in mechanism for dealing with economic slowdowns. Worse, the eurozone’s regulations actually exacerbate economic instabilities within and between its members countries, making it far more likely for a slowdown to morph into a collapse than previously.
This is something that Feasta members have also been concerned about ever since the euro was introduced. Feasta co-founder Richard Douthwaite wrote in 2005:
“With the euro established….devaluation is no longer possible and unless some equally effective alternative adjustment mechanism can be used, countries could find themselves locked into high levels of unemployment and poverty for a decade or more. So much social unrest could occur during this period that nationalist politicians might come to power promising to take their stricken countries out of the EU altogether. The whole European structure could come apart.”
As Douthwaite predicted, Greece’s financial crisis destabilised all of Europe since Greece could not devalue its currency. To make matters worse, the rules of the eurozone exacerbated the tensions between Greece and Germany because each country’s debt is considered to be its own problem and countries are not allowed to bail each other out. (Since Varoufakis’ book was written, we’re seeing severe problems crop up in Italy now too.)
This rigid stance was, and is, reinforced by moralistic sermonising by various politicians in the creditor nations on the sanctity of debt, and faulty assumptions about how and why it first arose. As Varoufakis says, the media in Germany and elsewhere (including Ireland) has tended to frame the crisis in terms of Aesop’s fable about the grasshopper who sang all summer and didn’t work hard enough to have food for the winter. So we’re told that those idle, feckless southern Europeans had quite a nerve to ask the hard-working, virtuous northern Europeans to bail them out.
The truth, as outlined above, is rather more complicated than that. What’s more, the idea that debt must always be treated as sacrosanct is extremely questionable, and has in fact been questioned throughout history. For example, not that long ago (as Varoufakis also points out), shortly after the Second World War, Greece and many other European countries were essentially bullied by the US into ‘forgiving’ Germany’s massive wartime debts to them.
How did this situation come about?
A German friend of mine says that he’s very worried that Germany is going to ‘destroy Europe for a third time’ because of the way that the Euro has been designed and the intransigence of certain German politicians and central bankers. Indeed, not only Europe is at risk: as Varoufakis describes it, “Berlin’s plan for eurozone member states to overcome the crisis relies on a combination of net exports and balanced budgets. Given the great excess of savings over investment in both the surplus and the deficit eurozone member states, the only way Berlin’s plan can work is if the eurozone turns into a mercantilist fiend.” (p 240).
But this book makes it clear that the fault for the flaws in the Euro’s design does not solely lie with Germany. France played a big role too. In fact, the Euro was originally the idea of French politicians who were concerned about German economic power dominating Europe. (An interesting detail mentioned by Varoufakis is that this imbalance of power between France and Germany was at least partly caused by some earlier currency woes. Back at the turn of the 20th century, France was part of a monetary union which tied the French franc to gold, and this choked off France’s economic development, with long-term repercussions.)
The French government hoped – in vain, as it turned out – to be able to administer the Euro, and thus win back some power from Germany. The two countries’ unhealthy rivalry led to some extremely offensive and provocative behaviour, in particular an article in the right-wing French establishment paper Le Figaro in 1992 which implied that the Maastricht Treaty resembled the Treaty of Versailles (the humiliating terms of defeat that Germany had had to endure at the end of the First World War).
So the Euro was developed in a climate of insecurity, posturing and blinkered, irrational competitiveness between Europe’s two biggest economic powers.
Varoufakis compares the United States favourably to the Eurozone, commenting that it has enormous regional economic differences but nonetheless has ‘consolidated magnificently’. He argues that while the US has certainly run into problems, it has developed ways to deal with them that have allowed the currency, and the economy, to survive thus far, and he believes that Europe could learn from those.
As he points out, within the US the New Deal, introduced in the 1930s by Roosevelt’s administration, and other federal-level policies help to ensure that if any state within the union suffers a major financial crisis, massive support will immediately and automatically flow into it via the FDIC, social security, Medicare and other federal programmes. There’s a particularly instructive footnote in which Varoufakis compares the fate of Nevada, which underwent a major crisis as a result of the 2008 crash but quickly recovered after being bailed out, with that of Ireland.
While his argument has some validity, I think Varoufakis has a tendency to overestimate both the US’s own stability and the degree of benevolence and insight on the part of the US policymakers who brought about the current global financial system. I’ll discuss these two assertions in reverse order.
Readers will probably already know that towards the end of the second World War, the Bretton Woods system was set up in order to regulate finance worldwide. It was essentially a kind of gold standard in which the dollar was pegged to gold and other currencies were pegged to the dollar.
Varoufakis describes the context in which this decision was made, including the fact that the British economist John Maynard Keynes tried to introduce a different system that probably would have worked much better, and that he was overruled at the Bretton Woods conference by American chief negotiator Harry Dexter White.
I found Varoufakis’ narrative confusing, however. While he seems to recognise that Keynes’ proposal was superior, he uses benign metaphors to describe the US’s role in the Bretton Woods system (e.g. “taking a war-torn world under its wing” (p16)), which, as we shall see, is a rather starry-eyed interpretation of what was going on. He also attributes White’s resistance to Keynes to his ‘anti-imperialist patriotic New Dealer’ values – the idea being that Keynes’ proposal would have given too much negotiating power to Britain and other bankrupt European countries, which had got themselves into dire straits by fighting the Second World War, and which were also prone to imperialist hubris (unlike the more high-minded US).
Whatever White’s own values and beliefs may have been, overall US policy at that time was rather more, shall we say, morally nuanced. A strongly imperialist strain had emerged over the previous few decades, and Filipinos and Cubans of the epoch might well have been provoked into hollow laughter by the idea that the US was inherently anti-imperialist. The decades to come would see an enormous expansion of the U.S.’s military presence all over the world, and the US-backed overthrow of numerous democratically-elected governments and installation of puppet regimes.
So Varoufakis’ statement that “Bretton Woods, the broad global plan in which it was embedded, and the brave new post-1971 world [after Nixon ended the gold standard] ….stood behind capitalism’s postwar planetary-scale triumph” (p237) could do with a bit more fleshing out. While some postwar policies initiated by the US, such as the Marshall Plan and the GATT, do seem relatively enlightened, the ‘triumph’ of capitalism might not have been quite so apparent were it not for a continual background threat of violent repression, punctuated by sporadic outbursts of extreme brutality. And as we’ll see below, there are also good reasons to question whether the triumph was really much of a triumph at all.
The sanctity of debt
I’ll go into some more detail here about international relations in the interwar and postwar periods, as I find the parallels with the present situation in the Eurozone instructive (and morbidly fascinating).
As the American economist Michael Hudson documents in his book Super-Imperialism, the US had actually played an important role in triggering the Second World War because of its hardline stance on foreign debt during the interwar years. (The sanctity of debt was, it would seem, going through one of its ‘inviolable’ phases.)
Unlike the victors of previous wars, the US insisted after 1918 that its allies France and Britain repay their wartime debts to it, while simultaneously putting up protectionist barriers . This made it impossible for the debtor countries to pay the debts back as they were unable to export their products to the US. So, in turn, they tightened the screws on Germany, which owed them wartime reparations. The result was a severe economic crisis in Germany, which brought the Nazis to power.
Hudson argues that US policymakers at the time of Bretton Woods did recognise that mistakes had been made by the US after 1918 and that things needed to be managed differently after the Second World War. However, they were also very worried about a potential swing to the left in their own country, and wished to forestall it by ensuring full employment. This meant that the US had to be able to export its products worldwide and that the people who purchased them had to have enough money to do so.
So a system was devised whereby the World Bank would be able to provide credit to any countries that were willing to sign up to the IMF’s rules regarding exchange rate management. And within the IMF, the US called the shots. (All sorts of other schemes which benefited US exports were also set up at the time, including the preferential treatment of US agricultural products and the undermining of local agriculture worldwide, for which we are now paying an enormous ecological price. But that’s a whole other story.)
There are striking similarities between this system and that of the Eurozone. Within both systems, stronger economies exported high value-added products to weaker countries and then lent the money they earned back to the weaker countries. Both systems were overly dependent on debt, and therefore contained the seeds of their own destruction.
It’s true that the Bretton Woods system was slightly more flexible than the Eurozone in that countries could negotiate adjustments to their exchange rates via the IMF. In practice, however, things deteriorated rapidly in the 1980s as the Bretton Woods institutions were quick to impose dogmatic austerity-based financial policies on countries which were unable to repay their debts, causing a great deal of suffering. To make matters worse, in the 1990s, the GATT was replaced by the more rigid WTO, which tilted the playing field decisively in favour of richer countries . (In recent years there has been some recognition by the IMF of the problems with their austerity-based approach but this has not stopped European governments from blindly copying it.)
Another striking aspect of the Bretton Woods system which Varoufakis points out is the fact that, despite its stated aims of stabilising the world economy and spreading prosperity, it morphed into an automatic bailout system for the US. Over time, the US went from being a creditor nation that was financing other countries’ recovery from the second world war, to a heavily indebted nation, and the other countries were obliged to keep on funding it.
(Varoufakis implies that it was American consumer spending that ran the US into debt. However, once again Hudson documents a different picture, showing that the indebtedness of the US was largely brought about by heavy spending by the US’s military industrial complex, in particular during the Vietnam War. As Hudson sardonically puts it, “people who do not understand this fail to understand both the ineffable benefits of slaughter and the financial mechanisms at work”. While Varoufakis correctly describes the French colonial war in Algeria as ‘hideous’, it seems quite jarring that he barely mentions Vietnam, and there is no hint in the book that there was anything negative about the Vietnam War. Lest we forget, a conservative estimate of the amount of fatalities caused by that conflict is around 1.5 million.)
To be fair, it’s unlikely that Harry Dexter White intended the Bretton Woods system to culminate in such a grotesque and macabre situation and he died long before that happened. However, if you read Hudson’s account alongside that of Varoufakis you’ll notice very striking symmetries between the prejudices of the European policymakers who were blinkered by fear and historical grievances when they designed the euro, and the American negotiators’ own limitations as they developed post-war international financial policy. (A particularly glaring example is that of Leo Crowley, an Irish-American and Anglophobe who persuaded Roosevelt to stipulate, before his death, that the Lend-Lease programme would be abruptly abolished when the war ended, leaving Britain in a precarious financial state. And another blow by the US against Britain – described by Varoufakis this time – was the favouring of Germany over Britain in the Marshall Plan, because Britain was considered to be in need of punishment after the election of Atlee’s Labour government in 1945.)
Despite my uneasiness with some aspects of Varoufakis’ analysis of the postwar period, we would probably both agree that a key reason for the flaws in the Bretton Woods system was that many (though not all) US policymakers simply failed to grasp the fact that in order for the world’s economy to be able to keep functioning, international trade needs to be balanced. To reiterate: there are strong parallels with the Eurozone here.
Stability in the world economy
Now we’ll move on to the second of my assertions: that Varoufakis’ analysis overestimates the stability of the US (and, as we’ll see, that of the world economy in general).
Back when Varoufakis was Greek Minister for Finance in the first half of 2015, Brian Davey wrote a commentary about the Greek crisis, the gist of which I’m going to paraphrase here. As we and many others in Feasta see it, an important missing dimension in Varoufakis’ analysis is energy, and more broadly, resource limitations.
I’ll focus on oil, as oil is still responsible for the vast majority of the world’s transportation, and it is proving extremely difficult (probably impossible) to come up with an equally efficient substitute for it. As one commentator puts it, “in the absence of a lower cost liquid fuel replacement for today’s high cost oil, the days of sustained GDP growth are behind us.” Renewables certainly have potential, particularly for electricity generation (provided some important limitations are taken into account) but they can’t sustain the massively bloated global transport sector, nor should they be expected to try.
With the global economy currently so dependent on long, fragile supply lines and cheap transport, it shouldn’t come as a surprise that whenever there has been an oil price shock, a global recession has tended to follow shortly afterwards. In an analysis of the 2008 financial crisis, James Hamilton of the University of California commented
“Whereas previous oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007–08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been similar to those observed in earlier episodes, with significant effects on consumption spending and purchases of domestic automobiles in particular. Absent those declines, it is unlikely that the period 2007Q4–2008Q3 would have been characterized as one of recession for the United States. This episode should thus be added to the list of U.S. recessions to which oil prices appear to have made a material contribution.”
As first sentence in the quote above suggests, there seems to be evidence that we have already passed ‘peak oil’ and that the remaining oil reserves will be increasingly different and expensive to extract. Even if this weren’t the case, climate mitigation requires that fossil fuel production be eliminated over the next few decades.
If oil prices rise significantly, or if the oil supply is cut off abruptly, the transport sector will be badly undermined, and this will then bring the whole economic house of cards down. So far, we’ve managed to keep the world economy spluttering along by dint of providing bucketloads of credit, in particular to banks that are judged to be too big to fail, but that can’t last forever, any longer than Greece’s debt bubble was able to last forever.
Needless to say, this problem applies not only in Europe, but also in the US and everywhere else, too. However cleverly the US manages to balance its own financial system by automatically recycling surplus revenue to vulnerable parts of the country (such as Nevada in the 2008 crisis), ultimately that system is still dependent on oil in order to function. I’ll explain this further in the section on money below.
At the end of his book, Varoufakis recommends some remedies for the Eurozone crisis. He came up with these in collaboration with Stuart Holland and James Galbraith. I had some difficulty in completely following their suggestions as they contained a fair amount of financial jargon, but if I understand correctly, they amount to various different strategies to try and stabilise the banking system from within, along with Keynesian spending policies that would circumvent the ECB’s strictures on countries baling each other out.
These seem like good and necessary ideas, and they are clever in that they don’t require a redesign of the entire system. I do wonder whether at least some of the money devoted to the author’s proposed Investment-led Recovery and Convergence Program and Emergency Social Solidarity Program (which would include en EU version of the US’s Food Stamps Program) might not be better spent on a universal basic income. (For a discussion of food stamps in the US, their impact on sustainable agriculture and the potential role that basic income could play, see this recent article by Mike Sandler.)
Additionally, and importantly, Varoufakis and his colleague’s proposals don’t address the energy-related challenges described above.
So what should be done?
In Feasta, we suggest implementing a programme called Cap and Share which could be introduced on an EU-wide level or, better yet, as a bilateral partnership between the EU and a group of Global South countries. It would include a gradual, planned phasing out of fossil fuel production and imports over the next three decades, enabling investors and policymakers to plan effectively and smooth the energy transition as much as possible.
Among other things, a planned phase-out of fossil fuel production would cause a gradual shrinking of the transport sector and a move towards more localised economies with much shorter supply lines. (As we’ve argued elsewhere, this doesn’t mean eliminating international trade altogether, but it does mean privileging local supplies for staple goods.) Were Cap and Share to be introduced on a bilateral basis in partnership with a bloc of low-income countries, it would also help to balance trade between the EU and the ‘less-developed’ world (another subject that I would have liked to see more coverage of in Varoufakis’ book), and would make a significant contribution towards the Sustainable Development Goals and climate justice.
In addition to smoothing the energy transition, there are several other things that are needed to stabilise the Eurozone:
– A change in the way that the money supply is created.
Varoufakis argues that the choice between stability and growth is a false one – that both can be achieved – but the global ecosystem suggests otherwise. Industrialised countries need to wean themselves off their dependency on growth if they are to survive and if they are not to drag the rest of the world into environmental collapse with them.
As many have already argued, this need for the comfortably-off to get by on less should not cause despair, as growth and wellbeing aren’t remotely equivalent. Our dependency on growth derives not from fundamental human needs, but rather from structural flaws in the world’s economy that make it overly reliant on expansion.
In particular, our global economic dysfunctions are rendered more acute by the financial system’s dependency on continual economic growth in order to keep functioning. Most money is created on a basis of credit by privately-owned banks. This means that if aggregate growth does not occur, there will not be sufficient profitability to pay off debts, and the money supply will be threatened, destabilising the economy.
With growth so dependent on fossil fuels (whose use, as we have seen above, cannot and should not be depended on in the future), a way needs to be found to end the link between money creation and growth. As Feasta’s Graham Barnes has argued, there are two core approaches which could be taken to address this challenge: ‘either we convince government to take back control and implement an environment-nourishing allocation of credit and direct spending; or we create alternative means of exchange and sources of credit with inbuilt environmental preferences”. The first of these approaches obviously requires action by governments or central banks, along the lines suggested in the 2012 IMF Working Group paper “The Chicago Plan Revisited”.
– Basic income and resource-based taxation. As mentioned above, I believe a basic income would be preferable to food stamps or other conditional and targeted progammes for redistributing wealth. A universal basic income for all EU citizens (or, better yet, for everyone in the world) that was sufficient to cover essential needs such as food and shelter would free up an enormous amount of time and energy for those people in industrialised countries who are currently bogged down in form-filling, proving their eligibility for benefits, chasing one short-term and unstable job after another, or having to hold down several jobs to cover the cost of living in high-rent areas (since they would have the option to move elsewhere and live off a modest basic income instead).
This time and energy would be extremely valuable in the context of an economy that needs to make a rapid transition away from fossil fuel use, and that is prone to strong fluctuations. Needless to say, the impact of basic income in low-income countries would be still stronger. It seems clear to me and others in Feasta that basic income would provide an essential underpinning for the other changes that we wish to bring about.
One criticism that is sometimes levelled at basic income advocates is that it could trigger inflation, including a rise in rental values. However, this could be forestalled by changes in the tax system, particularly the introduction of a land value tax, as such a tax could cream off any profits that landlords make from raising their rent (the profits would then be redistributed as part of the basic income). As many have pointed out, land value tax is the fairest tax, since it doesn’t penalise work or improvements to property, and unlike VAT, it isn’t regressive. Other resource-based taxes or fees, such as the fee for fossil fuel production permits under Cap and Share or taxes on the electromagnetic spectrum, would also be progressive, as would a “Robin Hood” tax (a tax on financial speculation). They would, moreover, provide an answer to another question that’s often asked of basic income advocates: how would basic income be paid for?
Varoufakis’ book is liberally peppered with metaphors, to the extent that some of them clash bewilderingly. However, I enjoyed very much the allusions to various Greek myths that were also sprinkled throughout.
If you’re interested in how the Eurozone got into the mess it’s in, the book is a very good place to start and it will provide you with lots of other useful information too. However, it is dangerously naive about the US’s role in the world economy, both historically and at present. It also – and equally importantly – ignores the serious challenges posed by the energy transition away from fossil fuel use and the fact that this transition will require a wholesale shift in focus away from economic expansion in industrialised countries and towards greater resilience.
Perhaps due to this downplaying of the importance of energy, it ignores also the crucial fact that the money supply is currently dependent on debt and that that will need to change if we are to manage to stabilise the financial system in a context of economic contraction.
So, while the reforms suggested at the end of the book would certainly be welcome, they won’t be effective unless they are accompanied by other EU-wide (and wider-reaching) measures, including those described above: a cap on fossil fuel production, a universal basic income, financial system reform to decouple money creation from debt, and resource-based taxation.
1. Super-imperialism, Michael Hudson, Pluto Press, 2003, p4
2. Bad Samaritans: the Guilty Secret of Rich Nations and the Threat to Global Prosperity, Ha-Joon Chang, RH Books, 2007
3. Super Imperialism (see footnote 1) p 324
4. The Fair Tax, ed.Emer Ó’Siochrú, Feasta and Smart Taxes, 2012
Featured image: Greek warships (triremes). The title of Varoufakis’ book is taken from a famous dialogue between the powerful Athenians and the weaker Melians. The Athenians decided to besiege Melos because it was a source of supplies during their war against the Peloponnese. In the dialogue, they explain that they are acting this way because ‘the strong do what they can, while the weak suffer what they must.’
Note: Feasta is a forum for exchanging ideas. By posting on its site Feasta agrees that the ideas expressed by authors are worthy of consideration. However, there is no one ‘Feasta line’. The views of the article do not necessarily represent the views of all Feasta members.
Caroline Whyte has been involved with Feasta since 2002. She studied ecological economics at Mälardalen University in Sweden, writing a masters thesis on the relationship between central banking and sustainability. She contributed to Feasta’s books Fleeing Vesuvius and Sharing for Survival. Along with four other Feasta climate group members she helped to launch the CapGlobalCarbon initative at the COP-21 summit in Paris in December 2015. She is also an active member of Feasta’s currency group . She is a Director of the Irish Environmental Network, is Feasta’s alternate representative on the Environmental Pillar, and is one of three Pillar members of the Irish National Economic and Social Council (NESC). She lives in central France, from where she edits the Feasta website.